Is FTC Hedging on Plans to Apply ID Theft Rule to Law Firms? #ABAChicago
H. Thomas Wells Jr. Photo by REP3
The Federal Trade Commission’s announcement that it would suspend implementation of a controversial regulation that would require many businesses to take steps to prevent identity theft gives the ABA more time to press its argument that the regulation should not be applied to lawyers, the association’s president said on Thursday.
The FTC announced on Wednesday that it would put off implementation of the so-called “red flag rule” until Nov. 1. Originally, the rule was scheduled to go into effect on Saturday, Aug. 1. The FTC cited uncertainty among small businesses about what their compliance obligations would be under the red flag rule.
“This gives us more time to talk to the FTC,” said ABA President H. Thomas Wells Jr. at a press briefing this morning as the association’s 2009 Annual Meeting opened in Chicago. “I think they’re starting to adjust their interpretation.” He noted that the FTC has concluded that lawyers who charge contingency fees would not be covered by the red flag rule.
In response to the FTC’s decision to delay implementation of the red flag rule, Wells, a partner at Maynard, Cooper & Gale in Birmingham, Ala., said the ABA has put on hold its plans to fight the rule in court, but he held out the possibility of legal action if the FTC seeks to extend the rule to lawyers.
The FTC developed the red flag rule to implement provisions of the Fair and Accurate Credit Transactions Act of 2003, which calls for financial institutions and other businesses defined as “creditors” to implement programs to identify and respond to warning signs—red flags—of efforts to commit identity theft against their customers. According to the FTC, the act’s definition of “creditor” encompasses all businesses that regularly permit deferred payments for goods or services. The FTC maintains that definition includes lawyers, who generally receive fees after doing work on behalf of clients.
The ABA, which has been joined by at least two dozen state and local bar associations in objecting to the red flag rule’s application to lawyers, bases its argument primarily on these points:
• Congress never intended the Credit Transactions Act to apply to lawyers.
• The manner in which lawyers bill their clients does not constitute an extension of credit. Ethics rules prohibit lawyers from billing clients until services are rendered.
• Applying the red flag rule to lawyers would have minimal, if any, impact on identity theft. The FTC has produced no evidence of identity theft occurring in a law firm context, while the ABA estimates that the cost for law firms around the United States to write plans for implementing the red flag rule might reach $3.8 billion in billable time.
Wells said there was no indication that the red flag rule would be applied to lawyers until the FTC notified the ABA’s Governmental Affairs Office in April that its interpretation of the regulation encompassed the legal profession. “It literally came out of the clear blue sky,” Wells said.
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